Tata Consumer Products (NSE:TATACONSUM) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tata Consumer Products Limited (NSE:TATACONSUM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tata Consumer Products

What Is Tata Consumer Products's Net Debt?

As you can see below, at the end of March 2023, Tata Consumer Products had ₹11.8b of debt, up from ₹10.2b a year ago. Click the image for more detail. But it also has ₹35.9b in cash to offset that, meaning it has ₹24.1b net cash.

How Healthy Is Tata Consumer Products' Balance Sheet?

According to the last reported balance sheet, Tata Consumer Products had liabilities of ₹39.2b due within 12 months, and liabilities of ₹17.6b due beyond 12 months. Offsetting these obligations, it had cash of ₹35.9b as well as receivables valued at ₹17.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.15b.

Having regard to Tata Consumer Products' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹774.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Tata Consumer Products boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Tata Consumer Products has increased its EBIT by 9.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tata Consumer Products can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tata Consumer Products has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Tata Consumer Products recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Tata Consumer Products's liabilities, but we can be reassured by the fact it has has net cash of ₹24.1b. And it impressed us with free cash flow of ₹11b, being 90% of its EBIT. So is Tata Consumer Products's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Tata Consumer Products's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.